How do we calculate 14.3 B in this question. 14.2 Consider a single-period binomial setting where the riskless interest rate is zero, and thereare no taxes. A firm consists of a machine that will produce cash flows of £210 if the economyis good and £80 if the economy is bad. The good and bad states occur with equal risk-neutralprobability. Initially, the firm has 100 shares outstanding, and debt with a face value of £50due at the end of the period. What is the share price of the firm?14.3 Suppose the firm in exercise 14.2 unexpectedly announces that it will issue additional debt,with the same seniority as existing debt and a face value of £50. The firm will use the entireproceeds to repurchase some of the outstanding shares.a What is the market price of the new debt?b Just after the announcement, what will the price of a share jump to?c Show how a shareholder with 20 per cent of the shares outstanding is better off as aresult of this transaction when he or she undoes the leverage change.d Show how the Modigliani-Miller Theorem still holds.

Hi, We need to calculate 14.2 first in order to calculate 14.3-B .Therefore, we will calculate the…

Answered: Suppose the firm in exercise 14.2…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter11: Capital Budgeting And Risk

Section: Chapter Questions

Problem 6P

See similar textbooks

Similar questions

Consider a two-date binomial model. A company has both debt and equity in its capital structure. The value of the company is 100 at Date 0. At Date 1, it is equally like that the value of the company increases by 20% or decreases by 10%. The total promised amount to the debtholders is 100 at Date 1. The riskfree interest rate is 10%. a. What is the value of the debt at Date 0? What is the value of the equity at Date 0? b. Suppose the government announces that it guarantees the company’s payment to the debtholders. How much is the government guarantee worth?
Q.A company will earn net profits of $100,000 if the economy booms (probability of 80%) and net profits of $60,000 if the economy enters a recession (probability of 20%). The company wants to take out a loan for $74,000 to finance its operations.Treasuries of the same maturity offer an interest rate of 6%. Assume risk neutrality. A)What payoff would the bank receive if it invested $74,000 in Treasuries? B)What payout should the bank be looking for during the boom (in $)? C)What interest rate should the bank quote?
Suppose you live in the Fama-French three-factor model world. Goldman Sachs is selling two derivative securities to your company. Both will pay 100 million dollars over a 10 year period. Assume time value of money is zero. Security A will pay out cash that is positively correlated with economic indicators, thus paying out more when economy is booming and less when economy is tanking. Security B will pay out cash that is negatively correlated with economic indicators, thus paying out more when economy is tanking and less when economy is booming. What should be the fair valuation of these two securities at the start of this 10 year period. A<100 million; B>100 million A=B Both are smaller than 100 million and A<B Both securities should be priced lower than 100 millions. But A>B
Consider a two-date binomial model. A company has both debt and equity in its capital structure. The value of the company is 100 at Date 0. At Date 1, it is equally like that the value of the company increases by 20% or decreases by 10%. The total promised amount to the debtholders is 100 at Date 1. The riskfree interest rate is 10%. a. What are the possible payoffs to the equityholders at date 1? What kind of financial product has the same payoffs? Please describe the detailed characteristics of the financial product. b. What are the possible payoffs to the bondholders at date 1? Are they riskfree? What kind of financial product/portfolio has the same payoffs? Please describe the detailed characteristics of the financial product/portfolio.
17. Zaman Pharmaceutical’s cost of debt is 9%. The risk–free rate of interest is 5%. The expected return on the market portfolio is 8%. After effective taxes, Zaman’s effective tax rate is 30%. Its optimal capital structure is 60% debt and 40% equity. a. If Zaman’s beta is estimated at 1.3, what is its weighted average cost of capital? b. If Zaman’s beta is estimated at 0.7, significantly lower because of the continuing profit prospects in the global energy sector, what is its weighted average cost of capital?
1. Arizona Rock, an all-equity firm, currently has a beta of 1.25. The risk-free rate, kRF, is 7 percent and kM is 14 percent. Suppose the firm sells 10 percent of its assets with beta equal to 1.25 and purchases the same proportion of new assets with a beta of 1.1. What will be the firm’s new overall required rate of return, and what rate of return must the new assets produce in order to leave the stock price unchanged? a. 15.645%; 15.645% b. 15.750%; 15.645% c. 14.750%; 15.750% d. 15.645%; 14.700% e. 15.750%; 14.700% 2. Dry Seal plans to issue bonds to expand operations. The bonds will have a par value of P1,000, a 10-year maturity, and a coupon interest rate of 9%, paid semiannually. Current market conditions are such that the bonds will be sold to net P937.79. What is the yield-to-maturity of these bonds? a. 10% b. 9% c. 11% d. 8% 3. You have just purchased a 15-year, P1,000 par value bond. The coupon rate on this bond is nine percent (9%) annually, with…
A) For questions A, B, and C, use the following information: Consider a firm whose debt has a market value of $35 million and whose stock has a market value of $55 million. The firm pays a 7 percent rate of interest on its new debt and has a beta of 1.23. The corporate tax rate is 21%. Assume that the security market line holds, that the risk premium on the market is 10.5 percent, and that the current Treasury bill is rate is 1 percent. What is the aftertax cost of debt? Format as a percentage and round to two places past the decimal point as "X.XX B) Consider a firm whose debt has a market value of $35 million and whose stock has a market value of $55 million. The firm pays a 7 percent rate of interest on its new debt and has a beta of 1.23. The corporate tax rate is 21%. Assume that the security market line holds, that the risk premium on the market is 10.5 percent, and that the current Treasury bill is rate is 1 percent. Using the pretax cost of debt from Question 7, what is the…
9 Kale Inc. forecasts the free cash flows to the firm (in millions) shown below. If the weighted average cost of capital is 11.0%, cost of equity is 16%, and FCF to the Firm is expected to grow at a rate of 5.0% after Year 2, what is the firm’s total corporate value, in millions?. Year 1 2 Free cash flow -P30 P130 Group of answer choices P1,686 P1,770 P1,925 P1837 P993 P1,456 P1,529 P1,606
Assume that You are risk manager at ABC Investment. ABC Investment lends 100.000.000 USD for 330 day and borrow 80.000.000 EUR to finance a new project for 180 day. Nowadays investors expect high volatility in FX and want to hedge itself. Find forward rate using exchange and interest rates below USD/TL: 5,8725/5,9850 EURO/TL: 6,6700/6,7250 USD faiz oranı: 4,50/5,00 EURO Faiz Oranı: 6,25/7,50 TLLIBOR: 12,25/14,00
Your firm has a perpetually growing unlevered cash flow equal to 430,000. The growth rate is 2.00%. The firm keeps a constant debt-to-equity ratio equal to 26%. The interest rate on debt is 3.50%. If the unlevered return on equity is 8.25% and the tax rate is 36%, what is the present value of the interest tax shield? Answer is PV(ITS)= 298,631.05 please write the steps
Assume capital markets are perfect. Kabo Industries currently has $12 million invested in shortterm Treasury securities paying 8%, and it pays out the interest payments on these securitieseach year as a dividend. The board is considering selling the Treasury securities and paying outthe proceeds as a one-time dividend payment.i. If the board went ahead with this plan, what would happen to the value of Kabo stock uponthe announcement of a change in policy?ii. What would happen to the value of Kabo stock on the ex-dividend date of the one-timedividend?iii. Given these price reactions, will this decision benefit investors?
Based in the U.S., Your firm faces a 25% chance of a potential loss of $20 million next year. If yourfirm implements new policies, it can reduce the chance of this loss by 10%, but these new policieshave an upfront cost of $300,000. Suppose the beta of the loss is 0, and the risk-free interest rate5%.ISa) If the firm is uninsured, what is the NPV of implementing the new policies?b) If the firm is fully insured, what is the NPV of implementing the new policies?c) Given your answer to question b), what is the actuarially fair cost of full insurance?d) What is the minimum-size deductible that would leave your firm with an incentive toimplement the new policies?e) What is the actuarially fair price of an insurance policy with the deductible in question d

SEE MORE QUESTIONS

Recommended textbooks for you

EBK CONTEMPORARY FINANCIAL MANAGEMENT

Finance

ISBN:

9781337514835

Author:

MOYER

Publisher:

CENGAGE LEARNING - CONSIGNMENT

International Financial Management

Finance

ISBN:

9780357130698

Author:

Madura

Publisher:

Cengage

EBK CONTEMPORARY FINANCIAL MANAGEMENT

Finance

ISBN:

9781337514835

Author:

MOYER

Publisher:

CENGAGE LEARNING - CONSIGNMENT

International Financial Management

Finance

ISBN:

9780357130698

Author:

Madura

Publisher:

Cengage

SEE MORE TEXTBOOKS